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Fitch Assigns Makro 'A+(tha)' Rating with Negative Outlook
May 24, 2016 / 6:41 AM / a year ago

Fitch Assigns Makro 'A+(tha)' Rating with Negative Outlook

(The following statement was released by the rating agency) BANGKOK, May 24 (Fitch) Fitch Ratings (Thailand) Limited has assigned a 'A+(tha)' National Long-Term Rating and 'F1(tha)' National Short-Term Rating to Siam Makro Public Company Limited (Makro). The Outlook is Negative. KEY RATING DRIVERS Leading Food Wholesaler: Makro has been the sole player in Thailand's modern-trade food wholesale market for more than 25 years. Unlike other large food retailers, Makro's target customers are operators, eg traditional retailers; distributors; hotels, restaurants and catering operators (HORECA) and institutional customers, which represented about 75% of its total revenue in 2015. Low Leverage but Rising: Fitch expects Makro's financial leverage (measured by FFO net adjusted leverage) to increase to 1.3x-1.4x over the next two years as its aggressive expansion is likely to continue. Makro has expanded aggressively after being acquired by CP ALL Public Company Limited (CP ALL, A+(tha)/Negative) in mid-2013. Its FFO net adjusted leverage had increased to 1.1x by end-2015 from a net cash position prior to the acquisition. Strong Sales Growth: Makro's sales growth is likely to be at a 9%-10% rate per year over the next two years, driven mainly by new stores opened in the last two years and those still to be opened. Makro plans to open about 10 stores per year in 2016-2017. The growth has also been supported by an expected recovery in the domestic economy and continued growth in Thailand's tourism. Narrow but Stable Margin: Makro's EBITDAR margin is relatively narrow at 5.5%-6.0% - reflective of its wholesaler operations - compared with those of other large food retailers with margins wider than 10%. Nonetheless, its margin has low volatility, supported by the defensive nature of its businesses which are mainly selling food products. Fitch expects its margin to hover in a narrow range of 5.7%-5.9% over the next three years. Concentration Risk: As a wholesaler, Makro has higher concentration risk than other players in the food retail industry in terms of the number of customers and stores. In addition, one key customer base - traditional retailers - is likely to shrink over the long term, given the continued transition of traditional trade to modern trade. However, Makro's strategy to tap more HORECA operators should partly help in mitigating this risk. Strong Brand Recognition: "Makro" is an internationally known brand in emerging markets for cash & carry wholesalers. CP ALL has been granted the right to use this brand in 11 countries in Asia, including Thailand and China, by SHV Group of the Netherland (the former, major shareholder of Makro). This supports Makro's medium-term plan to expand into other ASEAN countries. Makro also owns several house brands. Linkage with CP ALL: Makro's National Long-term Rating incorporates a one-notch uplift from its standalone credit profile. This is to reflect Makro's strategic importance to its 98%-holding parent company, CP ALL, in the food retail market both in Thailand and in the region. The Negative Outlook reflects the Outlook on CP ALL. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Opening of 10 new large-format stores a year in 2016-2017 - Total sales growth of 9%-10% a year in 2016-2017 - A slight narrowing in the EBITDAR margin to 5.7%-5.9% in 2016-2017 - No capex for offshore expansion in 2016-2018. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to revision of the Outlook to Stable from Negative include: - A positive action on CP ALL Negative: Developments that may, individually or collectively, lead to negative rating action include: - An aggressive debt-funded investment leading to an increase in FFO-adjusted net leverage to above 2.5x on a sustained basis, or - A deterioration in EBITDAR margin to below 4.5% on a sustained basis, or - A negative rating action on CP ALL, or - Weakening ties with CP ALL. Contacts: Primary Analyst Somruedee Chaiworarat Director +66 2108 0160 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road, Lumpini, Patumwan, Bangkok 10330 Secondary Analyst Nichaya Seamanontaprinya Associate Director +66 2108 0161 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 9 May 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(tha)' for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. Additional information is available at Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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